[PDF] GAO- 21-137 MILITARY HOUSING: Actions Needed to Improve the

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MILITARY HOUSING

Actions Needed to

Improve the Process

for Setting Allowances for Servicemembers and Calculating

Payments for

Privatized Housing

Projects

Report to Congressional Committees

January 2021

GAO-21-137

United States Government Accountability Office

United States Government Accountability Office

Highlights of GAO-21-137, a report to

congressional committees

January 202

1

MILITARY HOUSING

Actions Needed to Improve the Process for Setting

Allowances for Servicemembers and Calculating

Payments for Privatized Housing Projects

What GAO Found

The Department of Defense (DOD) has established a process to determine basic allowance for housing (BAH) rates, which help cover the cost of suitable housing in the private sector for servicemembers. However, DOD has not always

collected rental data on the minimum number of rental units needed to estimate the total housing cost for certain locations and housing types. GAO analysis

found that 44 percent (788 of 1,806) of locations and housing types had fewer than the minimum sample-size target. Until DOD develops ways to increase its sample size, it will risk providing housing cost compensation that does not accurately represent the cost of suitable housing for servicemembers. DOD followed congressional requirements for calculating BAH redu ctions and payments to privatized housing projects. However, while the 2019 congressionally mandated payments lessened the financial effects of BAH reductions, as intended, they did not do so commensurate with the amount of the

BAH reduction. GAO found tha

t privatized housing projects received payments that were either over or under the amount of revenue lost from reductions made

to BAH, in some cases by $1 million or more. (see figure) Number of Privatized Housing Projects and Amounts That Congressionally Mandated

Payments Were Above or Below the Basic Allowance for Housing (BAH) Reduction Estimate (in 2019) These distortions occurred because the legal requirements for calculating the BAH reduction and the congressionally mandated payments differ. Specifically, the law requires that the BAH reduction be a set dollar amount, regardless of location, while paymen ts to privatized housing projects are required to differ by location. This required method of calculating the BAH reduction amounts is consistent with how prior reductions were calculated. According to DOD, BAH rates were reduced so that servicemembers sha re a portion of housing costs, and that reduction amount was the same for servicemembers with the same pay grade and dependency status, regardless of location. Until Congress takes steps to ensure congressionally mandated payment calculations are consisten t with how BAH reductions are calculated, some privatized housing projects will continue to receive more or less than was intended.

View GAO-21-137. For more information,

contact Elizabeth A. Field at (202) 512-2775 or fielde1@gao.gov.

Why GAO Did This Study

DOD spent about $20 billion in fiscal

year 2019 on BAH—often one of the largest components of military pay. BAH is designed to cover a portion of servicemembers' housing rental and utility costs in the private sector.

Starting in 2015, DOD reduced BAH

rates so that servicemembers share a portion of housing costs. The majority of servicemembers rely on the civilian housing market, while others rely on government housing or privatized housing projects. These projects rely on BAH as a key revenue source. In

2018-2020, Congress required DOD to

make payments to these projects to help offset the BAH reduction.

Senate Report 116-48 included a

provision for GAO to review DOD's

BAH process. This report evaluates,

among other things, the extent to which (1) DOD established a process to determine BAH and (2) DOD's congressionally mandated payments to projects lessened the effects of BAH reductions. To conduct this work, GAO reviewed relevant guidance and other documents, analyzed key data, and interviewed cognizant DOD officials.

What GAO Recommends

GAO is making a matter for

congressional consideration to revise statutory language to ensure payments to privatized housing projects are consistent with BAH reductions. GAO is also making three recommendations, including that DOD review its sampling methodology to increase sample size.

DOD concurred with two

recommendations. DOD also partially concurred with one recommendation, which GAO continues to believe is valid, as discussed in the report. Page i GAO-21-137 Military Housing

Letter 1

Background 6

DOD Has Established and Implemented a Process to Determine

BAH Rates, but Has Not Consistently Met Minimum

Sample-

Size Targets, Used Current Data, or Fully Documented Its

Process 12

DOD Has Taken Some Steps to Monitor the Appropriateness of BAH Rates, but Could Strengthen Its Efforts through More

Consistent Monitoring

27
Congressional Requirements for Calculating Payment s to Privatized Housing Projects Lessened the Financial Effects of BAH Reductions, but Created Unintended Distortions 34

Conclusions 41

Matter for Congressional Consideration

42

Recommendations for Executive Action 42

Agency Comments and Our Evaluation

43

Appendix I

Overview of Alternative Federal Government Methods for

Collecting Housing Data 45

Appendix II Interpolation Table and National Average Basic Allowance for

Housing (BAH) Rates for Servicemembers in 2020

50

Appendix III

Comments from the Department of Defense 53

Appendix IV GAO Contact and Staff Acknowledgments 56

Related GAO

Products 57

Contents

Pag e ii GAO-21-137 Military Housing

Tables

Table 1: The Six-Anchor-Point Housing Types for the Basic Allowance for Housing and Possible Substitutions 16 Table 2: Number and Percentage of the 301 Military Housing

Areas That Did Not Meet Department of Defense's

Minimum Housing Area Target for the 2019 Basic

Allowance for Housing Data Collection by Housing Type 20 Table 3: Number and Percentage of the 301 Military Housing

Areas That Did Not Meet Department of Defense's

Minimum Threshold of 16 for the 2019 Basic Allowance for Housing Data Collection by Housing Type 21
Table 4: Topics of Ad-Hoc Studies of Department of Defense's

Basic Allowance for Housing, by Year 28

Table 5: Reductions in the Monthly and Annual Basic Allowance for Housing by Pay Grade and Dependency Status, 2020 35 Table 6: Amounts of Congressionally Mandated Payments above or below the Basic Allowance for Housing (BAH)

Reduction in 2019

38
Table 7: DOD's Basic Allowance for Housing Process for Collecting Rental Housing Data Compared to External

Alternative Methods 47

50
Table 8: Basic Allowance for Housing Standards and

Interpolation between Anchor Points

P erformed

Table 9: Monthly

and Annual N ational A verages for the Basic Allowance for Housing (BAH) Rates by Pay Grade and

Dependency Status, Calendar Year 2020

51

Figures

Figure 1: DOD Has Reported Annual Percentage Increases in the

Average Basic Allowance for Housing

8 Figure 2: Typical Funding Structure for a Privatized Housing

Project 10

Figure 3: DOD's Basic Allowance for Housing (BAH) Data

Collection and Rate

Setting Process 13

Figure 4: Number of Privatized Housing Projects and Amounts

That Congressionally Mandated Payments Were above

or below the Basic Allowance for Housing (BAH)

Reduction Estimate in 2019 39

Page iii GAO-21-137 Military Housing

Abbreviations

BAH Basic Allowance for Housing

DOD Department of Defense

MHO Military Housing Office

OSD Office of the Secretary of Defense

OUSD(P&R) Office of the Under Secretary of Defense for Personnel and Readiness This is a work of the U.S. government and is not subject to copyright protection in the

United States. The published product may be

reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. Page

1 GAO-21-137 Military Housing

441 G St. N.W.

Washington, DC 20548

January 2

5, 2021

Chairman

Ranking Member

Committee on Armed Services

United States Senate

The Honorable Adam Smith

Chairman

The Honorable

Mike Rogers

Ranking Member

Committee on Armed Services

House of Representatives

The Department of Defense (DOD) spent about $20 billion in fiscal year

2019 to pay the basic allowance for housing (BAH) to approximately 1

million eligible active-duty servicemembers who live in the United States. 1 BAH is often one of the largest components of cash compensation for military personnel, second only to basic pay. 2

BAH is designed to provide

fair housing allowances to servicemembers to help cover a portion of the monthly costs of rent and utilities. By law, BAH rates are to be based on the cost of adequate housing for civilians with comparable income levels in the same areas. 3 In an effort to determine appropriate BAH rates, DOD collects data on rental properties that are considered suitable and adequate for servicemembers of the designated rank. Prior to 2002, BAH was calculated to cover the estimated local average housing cost for a given pay grade and dependency status - made up of 1 DOD provides servicemembers with other types of housing allowances depending on varying circumstances, like the Overseas Housing Allowance, the BAH differential for servicemembers paying child support, and the partial BAH for unaccompanied servicemembers living in government-owned housing. This report addresses DOD's process to set the BAH for servicemembers with and without dependents living in the United States, which comprised more than 90 percent of annual housing allowances paid to military personnel in 2019. 2

DOD provides active

duty personnel with a comprehensive compensation package that includes a mix of cash, such as basic pay; noncash benefits, such as health care; and deferred compensation, such as retirement pen sion. Servicemembers, including eligible reserve personnel serving on active duty, are eligible to receive the basic allowance to pay for housing and utilities as a cash payment every month while on active duty. 3

37 U.S.C. § 403(b)(2).

Letter

Page

2 GAO-21-137 Military Housing

rent, utilities, and renter's insurance - minus 15 percent of the estimated national average housing cost for that pay grade and dependency status. This approach resulted in servicemembers paying a portion of their housing costs out of pocket. 4

In 2002, DOD began reducing out-of-pocket

housing costs for servicemembers. From 2005 through 2014, BAH was calculated to cover 100 percent of local average housing costs. In a subsequent effort to slow the growth of BAH, DOD in 2014 requested that Congress once again require servicemembers to pay a portion of the ir housing costs out of pocket and eliminate renter's insurance costs from the housing allowance. In response, the National Defense Authorization Acts for Fiscal Years 2015 and 2016 authorized DOD to use a phased approach to reduce BAH rates to cover appro ximately 95 percent of the estimated average housing costs of servicemembers. 5

Moreover, the

renter's insurance cost was eliminated from the housing allowance starting in 2015. BAH is paid to servicemembers regardless of whether they live in civilian or privatized housing. The vast majority of servicemembers - about two- thirds - rely on the civilian housing market, while the remaining servicemembers live in government housing or privatized housing. 6 Privatized housing is owned and managed by private sector deve lopers who work with the military departments to rebuild and renovate military 4 While DOD estimates BAH allowance based on local rental market costs, servicemembers may choose to apply their BAH toward purchasing a home or renting a housing unit that could be more or less than their BAH. Servicemembers are permitted to keep any portion of their BAH not spent on housing and conversely will have to use other funds to pay housing costs that exceed their BAH. 5 The National Defense Authorization Acts for Fiscal Years 2015 and 2016 authorized DOD to reduce each local BAH amount by up to a specified percent of the national average BAH amount for the same rank and dependency status in a phased approach (1 percent in 2015, 2 percent in 2016, 3 percent in 2017, 4 percent in 2018 and 5 percent in

2019 and beyond). DOD set its annual budgets to reflect the full amou

nt of the authorized reductions. 6 In 1996, to enable DOD to privatize its housing, Congress provided the department with a variety of authorities to obtain private sector financing and management to repair, renovate, construct, and operate military housing . See the National Defense Authorization

Act for Fiscal Year 1996, Pub. L. No. 104

106, §§ 2801

2802 (1996),

codified as amended at 10 U.S.C. §§ 2871

2894a.

Page

3 GAO-21-137 Military Housing

housing. 7 These developers operate 99 percent of domestic military family housing, as well as a limited amount of housing for unaccompanied military personnel. The developers re ly on servicemembers' BAH payments as a key revenue source for these privatized housing projects. According to DOD officials, servicemembers who live in privatized housing are not expected to share the housing cost and, therefore, do not pay more than the

BAH rate.

Since 1998, we have conducted various reviews related to BAH and military housing privatization. In 2011, we reported that DOD uses a data- intensive process to set housing allowance rates, but that enhancements related to quality of data as well as cost estimating for budget estimates could improve the process. 8

We recommended, among other things, that

DOD assess the benefits and drawbacks of revising its definition of available housing for data collection purposes, and that it develop a communica tions process for installations to share information on housing tools. DOD generally concurred with our recommendations and took the necessary steps to implement them. In 2018, we reviewed the financial condition of DOD's privatized housing projects and found that DOD should take steps to improve monitoring, reporting, and risk assessment. 9 We recommended, among other things, that DOD fully assess the effects of reductions in BAH on the projects, define tolerances for project risks, and revise guidance to ensure that financial information on privatized housing projects are consistent and comparable. DOD concurred with our recommendations and has been taking steps to address them. For example, in August 2018, DOD issued revised instructions to the military de partments for data submissions for subsequent congressional reports to clarify how debt coverage ratios should be calculated and to clarify the instructions regarding reporting periods. A list of related products is included at the end of this report. 7

Privatized housing projects are run by a private

sector partner. For the purposes of this report, we refer to this partner as a developer or developers. Developers are alternately referred to by the military departments as project owners, private partners, or managing members. Developers may also be referred to as a lessor of a privatized housing proje ct in their capacity as landlord to the servicemembers who rent the privatized housing. 8 GAO, Military Housing: Enhancements Needed to Housing Allowance Process and Information Sharing Among Services, GAO-11-462 (Washington, D.C.: May 16, 2011). 9 GAO, Military Housing Privatization: DOD Should Take Steps to Improve Monitoring, Reporting, and Risk Assessment, GAO-18-218 (Washington, D.C.: Mar. 13, 2018). Page

4 GAO-21-137 Military Housing

Sena te Report No. 116

48, which accompanied a bill for the National

Defense Authorization Act for Fiscal Year 2020, included a provision for us to review DOD's process for calculating BAH. This report evaluates the extent to which (1) DOD established and imple mented a process using complete and current housing information to determine BAH rates; (2) DOD monitors the appropriateness of BAH rates; and (3) DOD's congressionally mandated payments to privatized housing projects lessened the effects of BAH rate reductions for those projects. 10 In appendix I, we also describe external alternative methods for collecting housing data. To address all three reporting objectives, we reviewed Office of the Secretary of Defense (OSD) policies and guidance for administration of the BAH program and interviewed officials from DOD's Military Compensation Policy directorate within the Office of the Under Secretary of Defense for Personnel and Readiness (OUSD(P&R)); the Deputy Assistant Secretary of Defense for Facilities Management within the Office of the Assistant Secretary of Defense for Sustainment; the BAH contractor; and BAH and housing representatives from each of the military services, including Military Housing Office (MHO) representatives from six military housing areas, ab out their roles and responsibilities in the BAH data collection and rate setting process. 11 In addition, for our first objective, we reviewed DOD's BAH guidance and outputs of the BAH process, including data collected to determine the total housing costs an d documentation showing OSD's calculations. We compared DOD's implementation of the BAH process to its program goals. We also determined that the information and communication component of internal control was significant to this objective, along with the underlying principles that management should use quality information and communicate the necessary quality information to achieve 10 In the National Defense Authorization Acts for fiscal years 2018, 2019, and 2020, Congress required DOD to make payments to privatized housing projects for a specified percentage based on the local BAH rate. 11 We judgmentally selected six military housing areas using the following criteria to guide our selection: (1) each of five services (Army, Navy, Marine Corps, Air Force, and Coast Guard) where the service is a primary MHO representative for one or more locations; (2) each of the four U.S. Census Bureau geographic regions (West, South, Midwest, and Northeast); and (3) small, midsize, and large populations of servicemembers receiving BAH within the military housing area. We selected Norfolk/Portsmouth, VA; Honolulu County, HI; Dover Air Force Base/Rehoboth, DE; Carlisle Barracks, PA; Sault Sainte

Marie, MI; and Bridgeport, CA.

Page

5 GAO-21-137 Military Housing

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